Key events
Here’s a grim example of Britain’s low-growth trap, from economics professor Jonathan Portes:
[usual caveats. This isn’t a proper analysis: 2008 was a peak, 1993 was early in a recovery. And most other advanced economies esp in Western Europe will also have slowed sharply. Still, even though I knew it was bad, didn’t think it was this bad.]
— Jonathan Portes (@jdportes) August 4, 2023
The Bank of England’s warning yesterday that interest rates will stay high for longer than many had hoped is a blow to Rishi Sunak, as he weighs up when to call an election.
As things stand, Sunak faces heading to the polls with the economy barely growing, and borrowing costs painfully high.
Sir John Redwood, a Conservative MP and former cabinet minister, argued that “targeted tax cuts would be extremely helpful” from the Treasury but said his main criticisms were directed at the Bank for lurching from low interest rates creating inflation to rates that “cause a housebuilding collapse and manufacturing recession”.
Reeves: Rate rise is ‘hammer blow’ for workers
Shadow chancellor Rachel Reeves has labelled yesterday’s rise in interest rates a “hammer blow for working people” which, she argues, did not need to happen.
Writing in the Daily Mirror, the shadow chancellor said the Government is “managing decline rather than getting us moving”.
She wrote:
“This rise – a hammer blow for working people – did not have to happen.
“The Tories crashed the economy with last September’s disastrous mini-Budget and left you paying the price.”
Reeves says Labour has a plan to improve the economy:
First, we’d make sure the banks provide support to mortgage holders who are struggling with repayments.
Second, we would introduce a proper windfall tax on the huge profits the oil and gas giants are making because of Russia ’s invasion of Ukraine and use that money to help families with the cost of living.
And third, we would put in place a long-term plan to secure and grow our economy.
Interest rates rising again will come as a hammer blow for working people.
After so much Tory economic damage, delivering change will not come easily.
But I know that only Labour’s plans can deliver it.
My @DailyMirror piece today.https://t.co/jSOyN0aONn
— Rachel Reeves (@RachelReevesMP) August 4, 2023
Introduction: Economy is caught in a trap, says Jeremy Hunt
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Britain is stuck in a ‘low-growth trap’, chancellor Jeremy Hunt has warned, after the Bank of England lifted interest rates to a 15-year high of 5.25% on Thursday.
The BoE also cut its growth forecasts yesterday, and warned that interest rates will remain “sufficiently restrictive for sufficiently long” to squeeze inflation out of the economy.
Hunt told Sky News that other advanced economies were also wedged in this trap saying:
It’s not just the UK, but Europe, the US, Canada, Japan…We’re all in a low-growth trap that we need to get out of.
The chancellor cited IMF forecasts that the UK’s long-term growth rates will be higher than France, Germany or Japan, but conceded “they’re not high enough.
Hunt points to the huge global shocks which have rocked the UK, including a 1970s-style energy crisis and a once in a century pandemic.
He pledges:
What you’ll see from me in the autumn statement, coming up, is a plan that shows how we break out of that low-growth trap and make ourselves into one of the most entrepreneurial economies in the world. That’s what we want.’
The Bank of England’s new growth forecasts are undoubedly poor.
It downgraded the outlook for GDP compared to its previous estimates released in May, particularly during 2024 and at the beginning of 2025.
Dr Linda Yueh, economics fellow at Oxford University, says the BoE’s forecasts are so dire she thought there was a typo in them.
She told Radio 4’s Today programme:
I thought there was a one missing. Growth is normally at least 1%. But the bank has said in 2024-2025, the growth rate is going to average only 0.25%.
It’s a quarter of a percent increase in national output, or national income. I thought it would be at least 1.25%
This is why the chancellor Jeremy Hunt says we’re at risk of being stuck in a low growth equilibrium.
High interest rates will not help the UK economy to grow, of course, as the Bank tries to bring inflation down. It expects consumer inflation to “fall markedly further this year”, but CPI isn’t expected to hit its 2% target until early 2025.
Governor Andrew Bailey cautioned it was too early to say when UK interest rates may start to be cut, saying:
“Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make sure that it falls all the way back to the 2% target.,
“That’s why we’ve raised rates to 5.25% today.”
Also coming up today
The US economy will be in focus this afternoon, when July’s jobs figures are released.
Economists predict around 200,000 new jobs were created in America last month, slightly down on June’s 209,000, with the unemployment rate is seen steady at 3.6%.
A strong jobs report could prompt further increases in US interest rates, while a poor report could encourage the Federal Reserve to stop its tightening cycle.
The agenda
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8.30am BST: Eurozone construction sector PMI index
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9am BST: UK new car sales for July
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9.30am BST: UK construction sector PMI index
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1.30pm BST: US Non-Farm Payroll jobs report for July
